I've been a silver bug for more than a decade. In looking at the supply/demand equasion over that period I concluded that the silver market is heading for a crackup of monumental proportions, a situation that will possibly result in the destruction of the market itself (for reasons similar to but greater than what's happened in the palladium market). If I am right, those who own physical silver and the shares of silver mining companies (and I own a lot of both) will be rewarded, those who play in the market buying and selling (mostly selling) paper contracts will lose their ampersands.
But all beliefs, all conclusions, must eventually be put to the test; if they can't be, they are worthless. If they are weighed and found wanting, they can be expensive both in dollars and in reputation. No one likes a false prophet, especially one that costs them money. And while no one could have lost money buying silver when I said to (it's more than twice the price at which I bought my last ounce), the time where my conclusion that silver stocks are perilously low - due to the monetary shenanigans of both governments and silver users - is about to be tested.
On September 27, 2006 the iShares Silver Trust (AMEX-SLV) filed a S-1 to register 15,222,727 shares at a proposed maximum offering price of $110.00 per share for a maximum net offering proceeds of $1,674,449,970.SLV has purchased more than 100m ounces of silver and taken it off the market so far. Where they got it I don't know (Warren Buffett?) but it represents a significant percentage of the world's known silver inventory. I had doubts they would be able to accumulate so much without exploding the market, as did the Silver Users Association. Well, they did it. And SLV was a great success, as shown by the above graph of their holdings of physical silver.
As of 09/28/2006, iShares Silver Trust showed 104,323,655 ounces of silver in the trust or 3,244.8 tonnes. This represented 10,450,000 shares. Thus the registration of the S-1 this week will effectively increase the amount of shares and silver by just under 150%.
So much so, they want to do it again.
If the SLV S-1 is accepted, and if they really attempt to purchase another 150 million ounces of physical silver (more than exists in the COMEX warehouses and about 25% of the world's known supply) I expect the market will explode. That silver is simply not available, at least nowhere near $11 an ounce. It had to come to this, and the fact that SLV didn't explode the market the first time increases the odds that they will be allowed to at least attempt to fill the offering.
It will certainly raise the price of silver. It should send silver into the stratusphere, at least if I'm correct about the current state of the market.
So that's where the test comes in. If it explodes the market, those who own physical silver will do very well. If it does not, then while silver owners will still do well, I'll need to re-examine my beliefs about the entire market.
If it sounds like a win/win, it is in all but pride. And I can live with that.